For the analysis of energy and climate polices, top-down energy-economy models are used extensively. In these models, innovation and technological change are generally included either exogenously, through the introduction of specific technology description and assumptions on factor efficiency improvement, or endogenously as the result of investment in research and development or of learning-by-doing. This dissertation presents innovative ways of including innovation and technological change in energy-economy models. It explores methods for improving the realism of energy-transformation in top-down economic models. Hence, it develops novel approaches of treating technology innovations, and changes thereof, and provides different applications of these approaches to analyze the impacts of climate policy and innovation on economic activity, energy transformation and consumption, and associated environmental impacts.

This dissertation, thus, covers important methodological issues as well as policy relevant aspects of innovation and climate change mitigation. It reflects on the questions of (1) how to introduce innovation and technological change in top-down computable general equilibrium (CGE) models as well as (2) what additional and policy relevant information is gained from using these methodologies.

A top-down computable general equilibrium (CGE) modeling approach was chosen as the basis for analysis of energy and climate policy because it offers several advantages. CGE models have a good coverage of economic and environmental indicators (Böhringer and Löschel, 2006). They offer a consistent and systematic framework and perform well in the quantitative analysis of trade-offs between environmental quality, economic performance, and income distribution. Moreover, they provide a framework open to linkages with models or modules from other disciplines (natural science/biophysical, climate research, socio-economic behavior, engineering technology descriptions). In their application to energy-economy-environment analysis they are prominent because of their detailed representation of energy flows. Emissions are associated with fossil fuel consumption in production, investment and final consumption (Böhringer and Löschel, 2006a). Thus, both energy flows and related emissions are directly linked to economic activity. CGE models emphasize the interaction between energy and non-energy markets and simulate the combined economy-wide responses to price changes induced by policies or shocks. They allow for output adjustments, structural shifts, and for input substitution, and they keep track of simultaneous changes in input intensity and associated emissions in all economic sectors. This implies that double counting of emissions is avoided and reductions in greenhouse gas emissions can be related to individual sectors.

There are several aspects CGE models are often criticized for: their lack of empirical evidence, the calibration to a base year, their lack of detailed sectoral and technical disaggregation, their restricted view on innovation and evolution thereof, their poor coverage of environmental indicators other than energy-related emissions, and the difficulties to reflect disequilibria, such as unemployment or under-utilization of production capacities (Böhringer and Löschel, 2006a). Some of these shortcomings have been tackled in recent studies and are specifically addressed in this dissertation. For example, the CGE model LEAN_2000, employed in this thesis, allows for disequilibria in the labor market by replacing the competitive labor market with a wage curve mechanism that allows for involuntary unemployment. Furthermore, the approaches shown in this thesis allow for detailed sectoral disaggregation and inclusion of a number of specific technological descriptions both on the supply and on the demand side of energy transformation. Chapter IV specifically addresses the shortcoming of environmental indicators in allowing for non-CO2 greenhouse gas emissions to be included into the analysis of climate policy.

The issue of innovation and technological change is the focus of this dissertation. Two new approaches to incorporate innovation and technological change are presented. The first approach is a hybrid approach where detailed technology descriptions are included into a CGE model not only on the energy supply side (specifically, electricity generation) but also on the energy demand side (specifically, the iron and steel industry). The primary strength of this hybrid approach is that it maintains the richness of engineering characteristics of key technologies, yet allows for a full general equilibrium analysis of energy or climate policies. It works at an intermediate level of technology detail, between the traditional aggregate production functions of top-down models and the extensive technology detail used in bottom-up models. It therefore immediately addresses the gap of bottom-up and top-down models. The approach permits a choice between several production technologies in selected sectors and allows for shifts in technology characteristics over time towards best practice, innovative technologies.

The second approach provides more insights into the effects of technological change, in particular learning-by-doing, in industries that are not immediately affected by climate policy but are responsible for delivering capital goods used in the energy sector. It therefore goes beyond the conventional way of introducing learning-by-doing in energy or electricity producing sectors by separating out the impact of learning-by-doing in economic activities that are located further up in the production chain (such as machinery and equipment that produce renewable energy technologies).

Chapters II and III are devoted to the implementation of the technology-based approach. The analyses pursue two primary objectives. The first is to construct an advanced methodology for the analysis of energy and climate policy that links economic activity with energy technologies. The second is to provide plausible scenarios of energy consumption and emissions mitigation in Germany for the next several decades. Chapter II presents an application to conventional and advanced electricity technologies with and without the option of CO2 capture and storage, while chapter III presents a first time application of the technology-based approach to an energy-intensive industry, namely iron and steel production.

The studies provide insights on the response of production sectors to policy-induced price changes, including changes in technology choice, in output, in the fuel mix and greenhouse gas emissions. In the context of climate change mitigation, the analysis reveals that it is important to model detailed electricity technologies together with detailed energy use in industrial processes in a consistent framework because greenhouse gas emissions from a specific industrial technology depend on the mix of electricity generation processes, which itself may change with a climate policy. The studies also show that shifts in technology are not singular events but continue over time as new investment decisions are taken. Thus, policies induce long-term shifts in production capacities, technological change and greenhouse gas mitigation.

The technology-based approach is an important step forward in representing industrial technologies in CGE models. In principle, CGE models are well suited to handle disaggregation of technologies and products, given sufficient data. The studies clearly demonstrate that it is constructive and feasible to operate CGE models at an intermediate level of technology detail. However, further research would be beneficial to fully exploit its potential:

First, even though the approach is much more detailed than typically found in a CGE model, it is less detailed than in some bottom-up linear programming models. One must make judgments as to the amount of detail to maintain and where to draw a system boundary around the processes modeled. Currently, there is little experience and no systematic study to guide this choice. Second, it remains difficult to find empirical support for the behavioral parameters that determine the rate of shift between technologies as their relative costs change. It is also difficult to parameterize future advanced technologies. Other CGE and linear programming modelers must also determine important behavioral and technical change parameters. This challenge is inherent to all technology modeling and remains a challenge in our technology-based approach. These parameters deserve further country-specific, empirical justification. Third, even though we have added technology detail to the CGE framework, we still must characterize each production route with a single equipment lifetime. This means we have little capability to represent retrofit options and possibilities for lifetime extension. Fourth, we cover only one of the energy-intensive industries (iron and steel) besides electricity production. An analysis of the effects of climate policy in Germany would deserve technological detail for additional sectors, at least the set of major energy-intensive industries.

The next chapter (chapter IV) addresses an issue that CGE analyses have often been criticized for: the lack of extended greenhouse gas mitigation options (Böhringer and Löschel, 2006a; Scrieciu, 2007). Therefore, this chapter specifically allows for reductions in non-CO2 greenhouse gas emissions in addition to energy-related mitigation options such as energy efficiency improvement, fuel switching or introduction of CO2 capture and storage. The study is designed to provide a balanced economic comparison of these different classes of mitigation options under a climate policy. Climate policy is represented by varying levels of a price for greenhouse gas emissions, either applied economy-wide or targeted to energy-intensive sectors of the economy according to the EU emissions trading scheme.

The study considers non-CO2 greenhouse gas mitigation options to be end-of-pipe options that can be deployed relatively quickly on both new and existing capital equipment. Therefore, some of the non-CO2 greenhouse gas mitigation potential is included in the baseline emissions scenario and a relatively small but still significant amount of additional reductions of non-CO2 greenhouse gas emissions is available for policy scenarios. In contrast, the rate by which other greenhouse gas mitigation options, such as efficiency improvement, fuel switching, and CO2 capture and storage, can be set up is generally limited by the rate that existing capital stocks retire.

This study provides more realistic scenarios of greenhouse gas mitigation options in Germany. Since Germany-specific marginal abatement costs curves for non-CO2 greenhouse gases were not available, cost curves for the European Union were used instead. Further empirical work would be helpful to improve the quantitative estimates for Germany.

Chapter V is devoted to the implementation of learning-by-doing in renewable energy in a multi-sector, multi-region CGE model. Commonly, in such models all learning in renewable energy is attributed to the renewable electricity sector. However, it is quite evident that part of the learning takes place in upstream sectors that deliver capital goods to the electricity sector, in particular in the production of renewable energy equipment. The main novelty of the chapter is to alternatively consider the impact of learning-by-doing in the renewable electricity sector and in economic activities that are located further up in the production chain. The analysis shows that it does matter to differentiate between learning-by-doing in the renewable energy equipment and in renewable electricity production. The difference originates from the effect of international trade, since energy equipment, i.e. machinery and equipment that is used to produce electricity, is intensively traded on international markets, unlike electricity.

The implementation of learning-by-doing in the renewable energy equipment industry reveals two main effects.

• The second effect relates to international trade. Learning improves the international competitiveness of renewable energy equipment (first-mover advantage) and stimulates national and international demand for this technology, which then again may induce higher learning.

An analysis of learning-by-doing effects in downstream production (e.g. electricity) alone is not able to take account of these international trade effects. In addition to international trade of a specific good, such as renewable energy equipment, knowledge and technical know-how about this good, which is responsible for learning processes, can spill over from one country to another. Depending on how such spillover effects are treated, substantial effects on domestic production and exports patterns can be observed. Our analysis reveals positive effects of learning-by-doing on export opportunities and domestic production in Germany. A main conclusion of this chapter is that, if learning-by-doing affects export sectors and improves international competitiveness, this has consequences for the economic assessment of the costs and benefits of climate policy.

The approaches and applications shown in this dissertation support the initial statement and prevalent agreement that it does matter to add technology-information in top-down economic models devoted to the analysis of energy and climate policies. The technology-based approach applied to the electricity and iron and steel sector in this dissertation shows that it is important to consider technology detail within a broader and consistent economic framework. It improves the realism of policy simulations in capturing simultaneous adjustments in economic activity in response to mitigation policies. Future research would involve expanding this type of analysis to other industries and adding a wide set of technological information for each industry. Drawing on bottom-up modelers’ extensive technology knowledge and data would be most beneficial. Further model development could also include endogenous adjustment of technological characteristics, such as through learning-by-doing or research and development investment.

The analysis may also be extended to other countries. This would provide the possibility to compare results between countries and incorporate effects on international trade, as it is shown in this dissertation for the analysis of learning-by-doing and spillover effects in Germany, the EU and the rest of the world. The stylized modeling of learning-by-doing in this dissertation may guide future empirical work distinguishing between sectors and incorporating spillover effects. Another important application may relate to the effects of technology transfer to developing countries. Specifically in the area of learning-by-doing, the analysis would further benefit from more refined empirical information and uncertainty analysis on sectoral learning rates and spillover effects.

Eventually it would be desirable to combine the approaches presented, add innovation and endogenous technical change for other sectors and countries, and link the modeling approach with models (or modules) from other disciplines to arrive at an integrated assessment of climate change mitigation options, and the associated economic, environmental and international trade effects.